First Indiana Corporation (“First Indiana” or the “Corporation”) is an Indiana corporation formed in 1986. It is the holding company for First Indiana Bank, N.A. (the “Bank”), the largest commercial bank headquartered in Indianapolis.

In the fourth quarter of 2005, the Corporation announced an agreement to sell the assets related to its trust business. This sale was closed on January 3, 2006.

The Corporation had total assets of $2.16 billion at December 31, 2006, an increase of $195.8 million from $1.97 billion at December 31, 2005. Loans outstanding were $1.69 billion and deposits were $1.61 billion at December 31, 2006.

Effective August 1, 2001, the Bank converted from a federal savings bank to a national bank and First Indiana became a bank holding company registered with the Federal Reserve Board. Effective September 25, 2001, the Federal Reserve Board approved the Corporation’s election to become a financial holding company. As a financial holding company, the Corporation may engage in activities that are financial in nature or incidental to a financial activity.

The Bank is engaged primarily in the business of attracting deposits from the general public and originating commercial and consumer loans. The Bank offers a full range of banking services through its offices in Central Indiana. The Bank also originates home equity loans nationally through Bank loan officers and an independent agent network. The Bank has consumer loan service offices in Indiana, Florida, Illinois, and Ohio. One Investment Partners, a subsidiary of the Bank, holds loans originated outside of Indiana.

First Indiana Corporation common stock is traded on the NASDAQ Global Select Market under the ticker symbol FINB. The principal executive offices are located at 135 North Pennsylvania Street, Suite 2800, Indianapolis, Indiana 46204, and the telephone number is (317) 269-1200. The website address is www.firstindiana.com. The information on the website does not constitute part of this Form 10-K.

Additional information about the Corporation’s business is set forth above under the heading “Financial Review – Overview.”

Business Segments

Information about the Corporation’s business segments is contained in Note 18 of the Notes to the Consolidated Financial Statements under the heading “Financial Review.”

Competition

The Bank faces substantial competition in originating both commercial and consumer loans. This competition comes principally from other banks, savings institutions, mortgage banking companies, and other lenders. Many of these competitors have competitive advantages, including greater financial resources and higher lending limits, a wider geographic presence, more accessible branch office locations, the ability to offer a wider array of services or more favorable pricing alternatives, as well as lower origination and operating costs. This competition could reduce the Corporation’s net income by decreasing the number and size of loans that the Bank originates and the interest rates it may charge on these loans.

In attracting business and consumer deposits, the Bank faces substantial competition from other insured depository institutions such as banks, savings institutions, and credit unions, as well as institutions offering

uninsured investment alternatives, including money market funds. Many of these competitors enjoy advantages, including greater financial resources, more aggressive marketing campaigns, better brand recognition, and more branch locations. These competitors may offer higher interest rates than the Bank, which could decrease the deposits that it attracts or require the Bank to increase its rates to retain existing deposits or attract new deposits. Increased deposit competition could adversely affect the Corporation’s ability to generate the funds necessary for lending operations, which could increase the cost of funds.

The Bank also competes with nonbank providers of financial services, such as brokerage firms, consumer finance companies, credit unions, insurance companies, and governmental organizations, which may offer more favorable terms. Some of these nonbank competitors are not subject to the same extensive regulations that govern banks and bank holding companies. As a result, such nonbank competitors may have advantages over the Bank in providing certain products and services. This competition may reduce or limit margins on banking services, reduce First Indiana’s market share, and adversely affect the Corporation’s earnings and financial condition.

Supervision and Regulation

First Indiana Corporation is a financial holding company and, as such, is subject to regulation under the Bank Holding Company Act of 1956, as amended (“BHC Act”). The BHC Act requires the prior approval of the Federal Reserve Board for a financial holding company to acquire or hold more than five percent voting interest in any bank and restricts interstate banking activities.

The Bank, the Corporation’s principal subsidiary, is a national bank and is subject to the provisions of the National Bank Act. The Bank is under the supervision of, and subject to periodic examination by, the Office of the Comptroller of the Currency (“OCC”), and is subject to the rules and regulations of the OCC, the Federal Reserve Board, and the Federal Deposit Insurance Corporation (“FDIC”). The Bank is subject to supervision and examination by the FDIC because the FDIC insures its deposits to the extent provided by law.

Regulations governing First Indiana and the Bank restrict extensions of credit by the Bank to First Indiana Corporation and, with some exceptions, other affiliates of the Corporation. For these purposes, extensions of credit include loans and advances to and guarantees and letters of credit on behalf of First Indiana and such affiliates. These regulations also restrict investments by the Bank in the stock or other securities of First Indiana and the covered affiliates, as well as the acceptance of such stock or other securities as collateral for loans to any borrower, whether or not related to First Indiana.

The Bank is subject to comprehensive federal regulations dealing with a wide variety of subjects, including reserve requirements, loan limitations, restrictions as to interest rates on loans and deposits, restrictions as to dividend payments, requirements governing the establishment of branches, and numerous other aspects of its operations. These regulations generally have been adopted to protect depositors and creditors rather than shareholders or holders of subordinated debt.

Payment of Dividends. Federal Reserve Board policy provides that, as a matter of prudent banking, a bank holding company generally should not maintain a rate of cash dividends unless its net income available to common shareholders has been sufficient to fully fund the dividends, and the prospective rate of earnings retention appears to be consistent with the holding company’s capital needs, asset quality, and overall financial condition.

There are various statutory restrictions on the ability of the Bank to pay dividends or make other payments to First Indiana Corporation, as described below. Prior regulatory approval is required if dividends to be declared by the Bank in any year would exceed net earnings of the current year (as defined under the National Bank Act) plus retained net profits for the preceding two years. At January 1, 2007, the Bank could have paid dividends to the Corporation of approximately $888,000 without regulatory approval. Due to the payment of an $11,000,000 special dividend in January 2003 (to partially fund the acquisition of MetroBanCorp), the Bank sought and

received approval from the OCC to make its regularly scheduled dividend payments in 2005, not to exceed $20,000,000. The Bank paid dividends of $20,000,000 to the Corporation in 2005. The Bank sought and received approval from the OCC to make its regularly scheduled dividend payments in 2004, not to exceed $19,000,000. The Bank paid dividends of $16,000,000 to the Corporation in 2004.

Under federal law, a depository institution is prohibited from paying a dividend if the depository institution would thereafter be “undercapitalized” as determined by the federal bank regulatory agencies. The relevant federal agencies also have the authority to prohibit a bank from engaging in what agencies determine are unsafe or unsound practices in conducting its business. The payment of dividends could, depending upon the financial condition of a bank, be deemed to constitute an unsafe or unsound practice.

Capital Requirements. First Indiana is subject to capital requirements and guidelines imposed on bank holding companies and financial holding companies by the Federal Reserve Board. The OCC and the FDIC impose similar requirements on the Bank. These capital requirements establish higher capital standards for banks and bank holding companies that assume greater risks. For this purpose, a bank holding company’s or a bank’s assets and certain off-balance sheet commitments are assigned to four risk categories, each weighted differently based on the credit risk. Total capital, in turn, is divided into two tiers:

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Tier 1 capital, which includes common equity, certain qualifying cumulative and noncumulative perpetual preferred stock and related surplus, and minority interests in equity accounts of consolidated subsidiaries; and

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Tier 2 capital, which includes perpetual preferred stock, and related surplus not meeting the Tier 1 definition, hybrid capital instruments, perpetual debt and mandatory convertible securities, certain term subordinated debt, intermediate-term preferred stock, and allowances for loan and lease losses (subject to certain limitations).

Goodwill, certain intangible assets, and certain other assets must be deducted in calculating the sum of the capital elements.

First Indiana, like other bank holding companies, is required to maintain Tier 1 capital and total capital equal to at least 4 percent and 8 percent, respectively, of total risk-weighted assets. As of December 31, 2006, the Corporation met both requirements, with Tier 1 and total capital equal to 10.56 percent and 13.16 percent, respectively, of total risk-weighted assets. The Bank was also in compliance with its applicable minimum capital requirement at December 31, 2006, with Tier 1 capital and total capital equal to 10.74 percent and 11.99 percent, respectively, of its total risk-weighted assets.

The Federal Reserve Board, the FDIC, and the OCC have incorporated market and interest rate risk components into their risk-based capital standards. Under these market risk requirements, capital is allocated to support the amount of market risk related to a financial institution’s ongoing trading activities. The Federal Reserve Board also requires a minimum “leverage ratio” (Tier 1 capital to adjusted average assets) of 3 percent for bank holding companies that have the highest regulatory rating or have implemented the risk-based capital measures for market risk, or 4 percent for holding companies that do not meet either of these requirements. The Bank is subject to similar requirements adopted by the OCC. As of December 31, 2006, the Corporation’s leverage ratio was 8.43 percent, and the Bank’s was 8.56 percent.

While federal regulators may set capital requirements higher than the minimums noted above if circumstances warrant it, no federal banking regulator has imposed any such special capital requirement on the Corporation or the Bank.

Source of Strength Doctrine. Under Federal Reserve Board policy, a bank holding company is expected to serve as a source of financial strength to its subsidiary bank and to stand prepared to commit resources to support its subsidiary bank. There are no specific quantitative rules on the holding company’s potential liability. If the

Bank were to encounter financial difficulty, the Federal Reserve Board could invoke the doctrine and require a capital contribution. In addition, and as a separate legal matter, a holding company is required to guarantee the capital plan of an undercapitalized subsidiary bank. See “FDICIA” below.

FDICIA. The Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”) requires federal regulators to take prompt corrective action against any undercapitalized institution. FDICIA establishes five capital categories: well-capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized. “Well-capitalized” institutions significantly exceed the required minimum level for each capital measure (currently, risk-based and leverage). “Adequately capitalized” institutions include depository institutions that meet the required minimum level for each capital measure. “Undercapitalized” institutions consist of those that fail to meet the required minimum level for one or more relevant capital measures. “Significantly undercapitalized” characterizes depository institutions with capital levels significantly below the minimum requirements. “Critically undercapitalized” refers to depository institutions with minimal capital and at serious risk for government seizure.

Under certain circumstances, a well-capitalized, adequately capitalized, or undercapitalized institution may be treated as if the institution were in the next lower capital category. A depository institution is generally prohibited from making capital distributions, including paying dividends or paying management fees to a holding company, if the institution would thereafter be undercapitalized. Institutions that are adequately but not well-capitalized cannot accept, renew, or rollover brokered deposits except with a waiver from the FDIC and are subject to restrictions on the interest rates that can be paid on such deposits. Undercapitalized institutions may not accept, renew, or rollover brokered deposits.

The banking regulatory agencies are permitted or, in certain cases, required to take certain actions with respect to institutions falling within one of the three undercapitalized categories. Depending on the level of an institution’s capital, the agency’s corrective powers include, among other things:

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prohibiting the payment of principal and interest on subordinated debt;

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prohibiting the holding company from making distributions without prior regulatory approval;

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placing limits on asset growth and restrictions on activities;

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placing additional restrictions on transactions with affiliates;

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restricting the interest rate the institution may pay on deposits;

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prohibiting the institution from accepting deposits from correspondent banks; and

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in the most severe cases, appointing a conservator or receiver for the institution.

A banking institution that is undercapitalized is required to submit a capital restoration plan, and such a plan will not be accepted unless, among other things, the banking institution’s holding company guarantees the plan up to a certain specified amount. Any such guarantee from a depository institution’s holding company is entitled to a priority of payment in bankruptcy.

FDICIA also contains a variety of other provisions that may affect First Indiana’s operations, including reporting requirements, regulatory standards for real estate lending, “truth in savings” provisions, and the requirement that a depository institution give notice to customers and regulatory authorities before closing any branch. As of December 31, 2006, the Bank exceeded the required capital ratios for classification as “well-capitalized.”

FDIC Insurance and Financing Corporation Assessments. The Federal Deposit Insurance Reform Act of 2005 (“the Reform Act”) instituted a new risk-based assessment system that ties each bank’s insurance premium to the risk they pose to the deposit insurance fund. Under this new system, the FDIC will evaluate each institution’s risk based on three primary sources of information; supervisory ratings for all institutions, financial

ratios for most institutions, and long-term debt issuer ratings for large institutions that have these ratings. Under the Reform Act, the FDIC has set 2007 assessment rates that will vary between five and seven cents per $100 of domestic deposits for nearly all of the industry. However, as part of the Reform Act, credits are provided to institutions that paid high premiums in the past to bolster the FDIC’s insurance reserves. As a result, the majority of banks will have assessment credits to initially offset all of their premiums in 2007. Management believes the Bank’s 2007 net premiums under these new regulations will not be material. Under the Federal Deposit Insurance Act, a depository institution may not pay interest on indebtedness, if such interest is required to be paid out of net profits, or distribute any of its capital assets while it remains in default on any assessment due to the FDIC.

In accordance with the Deposit Insurance Funds Act of 1996, the Financing Corporation (“FICO”) debt service assessment became applicable to all insured institutions as of January 1, 1997. The FICO debt service assessment due is based upon a quarterly multiplier which is not tied to the FDIC risk classification. The FICO rates are determined quarterly.

Transactions with Affiliates. Transactions between the Bank and its affiliates are governed by the Federal Reserve Act. The affiliates of the Bank include First Indiana Corporation and any entity controlled by First Indiana Corporation. Generally, laws (1) limit the extent to which the Bank may engage in “covered transactions” with any one affiliate to an amount equal to 10 percent of the Bank’s capital stock and surplus, and maintain an aggregate limit on all such transactions with affiliates to an amount equal to 20 percent of the Bank’s capital stock and surplus, (2) require that the Bank’s extensions of credit to such affiliates be fully collateralized (with 100 percent to 130 percent collateral coverage, depending on the type of collateral), (3) prohibit the Bank from purchasing or accepting as collateral from an affiliate any “low quality assets” (including non-performing loans), and (4) require that all “covered transactions” be on terms substantially the same, or at least as favorable, to the Bank or its subsidiary as those provided to a non-affiliate. The term “covered transaction” includes the making of loans, purchase of assets, issuance of a guarantee, and other similar types of transactions.

Loans to Insiders. The Federal Reserve Act and related regulations impose specific restrictions on loans to directors, executive officers, and principal stockholders of banks. Under Section 22(h) of the Federal Reserve Act and its implementing regulations, loans to a director, an executive officer, or a principal stockholder of a bank, and some affiliated entities of any of the foregoing, may not exceed, together with all other outstanding loans to such person and affiliated entities, the bank’s loan-to-one-borrower limit. Loans in the aggregate to insiders and their related interests as a class may not exceed the bank’s unimpaired capital and unimpaired surplus. Section 22(h) and its implementing regulations also prohibit loans, above amounts prescribed by the appropriate federal banking agency, to directors, executive officers and principal stockholders of a bank or bank holding company, and their respective affiliates, unless such loan is approved in advance by a majority of the board of directors of the bank with any “interested” director not participating in the voting. Section 22(h) generally requires that loans to directors, executive officers, and principal stockholders be made on terms and underwriting standards substantially the same as offered in comparable transactions to other persons.

Community Reinvestment Act. Under the Community Reinvestment Act and related regulations, depository institutions have an affirmative obligation to assist in meeting the credit needs of their market areas, including low and moderate income areas, consistent with safe and sound banking practices. The Community Reinvestment Act requires the adoption by each institution of a Community Reinvestment Act statement for each of its market areas describing the depository institution’s efforts to assist in its community’s credit needs. Depository institutions are periodically examined for compliance with the Community Reinvestment Act and are periodically assigned ratings in this regard. Banking regulators consider a depository institution’s Community Reinvestment Act rating when reviewing applications to establish new branches, undertake new lines of business, and/or acquire part or all of another depository institution. An unsatisfactory rating can significantly delay or even prohibit regulatory approval of a proposed transaction by a bank holding company or its depository institution subsidiary. The most recent Community Reinvestment Act rating the Bank has received was “satisfactory.”

Privacy Provisions of the Graham-Leach-Bliley Act. Federal banking regulators, as required under the Graham-Leach-Bliley Act (“the GLB Act”), have adopted rules limiting the ability of banks and other financial institutions to disclose nonpublic information about consumers to nonaffiliated third parties. The rules require disclosure of privacy policies to consumers and, in some circumstances, allow consumers to prevent disclosure of certain personal information to nonaffiliated third parties. The privacy provisions of the GLB Act affect how consumer information is transmitted through diversified financial services companies and conveyed to outside vendors.

Sarbanes-Oxley Act of 2002. The Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”) implemented a broad range of corporate governance and accounting measures to increase corporate responsibility, to provide for enhanced penalties for accounting and auditing improprieties at publicly traded companies, and to protect investors by improving the accuracy and reliability of disclosures under federal securities laws. The Corporation is subject to Sarbanes-Oxley because it is required to file periodic reports with the SEC under the Securities and Exchange Act of 1934. Among other things, Sarbanes-Oxley and/or its implementing regulations have established new membership requirements and additional responsibilities for the Corporation’s audit committee, imposed restrictions on the relationship between the Corporation and its outside auditors (including restrictions on the types of non-audit services outside auditors may provide to the Corporation), imposed additional responsibilities for the Corporation’s financial statements on the chief executive officer and chief financial officer, expanded the disclosure requirements for corporate insiders, required the Corporation’s management to evaluate the Corporation’s disclosure controls and procedures and its internal control over financial reporting, and required the outside auditors to issue a report on the Corporation’s internal control over financial reporting.

Patriot Act. On October 26, 2001, President Bush signed into law the USA Patriot Act of 2001 (the Patriot Act). The Patriot Act substantially broadened the existing anti-money laundering legislation. In particular, the Patriot Act requires financial institutions, as defined by the Patriot Act, to create and maintain certain anti-money laundering programs. One such program relates to the opening of new accounts. Financial institutions must include in their programs procedures to open new accounts in conjunction with the specific information that must be obtained before the account may be opened by the financial institution.

Fair Lending; Consumer Laws. In addition to the Community Reinvestment Act, other federal and state laws regulate various lending and consumer aspects of the banking business. Governmental agencies, including the Department of Housing and Urban Development, the Federal Trade Commission, and the Department of Justice, have become concerned that in some cases prospective borrowers experience unlawful discrimination in their efforts to obtain loans from depository and other lending institutions. These agencies have brought litigation against some depository institutions alleging discrimination against borrowers. Many of these suits have been settled, in some cases for material sums, short of a full trial.

The various governmental agencies involved in regulating depository and other lending institutions have provided various factors they will use to determine the existence of lending discrimination under the Equal Credit Opportunity Act and the Fair Housing Act. These factors include evidence that a lender discriminated on a prohibited basis, evidence that a lender treated applicants differently based on prohibited factors in the absence of evidence that the treatment was the result of prejudice or a conscious intention to discriminate, and evidence that a lender applied an otherwise neutral non-discriminatory policy uniformly to all applicants, but the practice had a discriminatory effect, unless the practice could be justified as a business necessity.

Banks and other depository institutions also are subject to numerous consumer protection laws and regulations. These laws include, but are not limited to, the Truth in Lending Act, the Truth in Savings Act, the Real Estate Settlement Procedures Act, the Electronic Funds Transfer Act, the Equal Credit Opportunity Act, The Fair and Accurate Credit Transactions Act, and the Fair Housing Act, as well as regulations of the Office of the Comptroller of the Currency. These laws and regulations require compliance by depository institutions covering a myriad of consumer issues, from providing lending disclosures to responding to consumer electronic funds transfer error claims.

Future Legislation. Because federal and state regulation of financial institutions changes regularly and is the subject of constant legislative debate, we cannot forecast how federal and state regulation of financial institutions may change in the future and impact the Corporation’s operations. Although Congress in recent years has sought to reduce the regulatory burden on financial institutions with respect to the approval of specific transactions, First Indiana fully expects that the financial services industry will remain heavily regulated in the near future and that additional laws or regulations may be adopted further regulating specific banking practices.

Employees

At December 31, 2006, the Corporation’s full-time equivalent employees totaled 514.

Reports on Corporation Website

First Indiana Corporation makes available free of charge through its Internet website the Corporation’s annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports as soon as reasonably practicable after they are electronically filed or furnished pursuant to Section 13 or 15(d) of the Exchange Act. These reports are available by going to the Corporation’s website (www.firstindiana.com) and selecting “Investor Relations” and then “SEC Filings.”

Item 1A. Risk Factors

Investments in the Corporation common stock involve risk. Because of the following factors, as well as other variables affecting our operating results, past financial performance may not be a reliable indicator of future performance, and historical trends should not be used to anticipate results or trends in future periods.

Growing deposits at a rate that optimally supports loan growth requires improving the Corporation’s deposit gathering capabilities.

As loan growth accelerates, the Corporation must also generate significant deposit growth. In the absence of sufficient deposit growth the Corporation will likely need to rely on higher cost borrowings to fund loan growth.

A significant challenge for the future of the Corporation is recruiting and retaining top talent.

In the Corporation’s competitive market, success will be determined in large part by who can hire and retain the best talent. Finding and retaining high performing employees is a particular challenge for banks in the Corporation’s core market of Central Indiana. Over the past several decades, the acquisitions of the largest banks in this market resulted in the elimination of comprehensive bank training programs in this area as their headquarters are now in other cities. At the same time, the number of banks in the market has increased. So while demand for quality bankers rose, supply diminished, causing a shortage of well-trained bankers in Indianapolis.

The Corporation’s earnings are significantly affected by general business and economic conditions, including credit risk and interest rate risk.

The Corporation’s business and earnings are sensitive to general business and economic conditions in the United States and in Central Indiana, in particular. These conditions include short-term and long-term interest rates, inflation, monetary supply, fluctuations in debt and equity capital markets, the strength of the U.S. and local economies and consumer spending, borrowing and saving habits. For example, an economic downturn, increase in unemployment, or higher interest rates could decrease the demand for loans and other products and services and/or result in a deterioration in credit quality and/or loan performance and collectability. Nonpayment of loans, if it occurs, could have an adverse effect on the Corporation’s financial condition and results of operations. Higher interest rates also could increase the Corporation’s cost to borrow funds and increase the rate the Corporation pays on deposits.

The Corporation may not be able to keep pace with advances in technology as well as its competitors.

The Corporation continually encounters technological change, and it may have fewer resources than many of its competitors to continue to invest in technological improvements, which could reduce its ability to compete. The financial services industry is undergoing rapid technological changes with frequent introduction of new technology-driven products and services. In addition to better serving customers, the effective use of technology increases efficiency and enables financial service institutions to reduce costs. The Corporation’s future success will depend, in part, upon its ability to address the needs of its customers by using technology to provide products and services to enhance customer convenience, as well as to create additional efficiencies in its operations. Many competitors have substantially greater resources to invest in technological improvements. The Corporation’s ability to compete could be reduced if it cannot effectively implement new technology-driven products and services.

The Corporation’s Consumer Finance Bank segment of operations may be adversely affected if the Bank is unable to secure adequate funding from secondary market investors or if the Bank is unable to originate sufficient volumes of consumer loans saleable into the secondary market. Both the origination and sale of its consumer loans expose the Corporation to potential liquidity risk, as well as volatility in the gains on sale of loans.

The Corporation regularly sells the majority of its closed-end and line of credit home equity loan originations into the secondary market. The success of its business depends on the continued participation of investors in this market. In the third quarter of 2006, an investor which previously has purchased approximately one-half of the Corporation’s volume of loans significantly reduced loan purchases and notified us of its intent to significantly reduce future purchases of loans. The investor’s action was in response to the credit deterioration of sub-prime loans in the national marketplace. Management is currently seeking new investors to replace the resultant shortfall in sales. However, should additional secondary market sources not be found, both the liquidity and revenues attributable to these sales could decrease. Further, recent experience indicates that the market for these loans has generated lower prices and therefore lower sales margins.

In response to these developments in the market, the Corporation is continuing to evaluate its Consumer Finance Bank segment in order to maintain an effective strategy going forward.

The banking and financial services industry is highly competitive.

The Corporation operates in a highly competitive environment in the products and services the Corporation offers and the markets in which it serves. The competition among financial services providers to attract and retain customers is intense. Customer loyalty can be easily influenced by a competitor’s new products, especially offerings that provide cost savings to the customer. Some of the Corporation’s competitors may be better able to provide a wider range of products and services over a greater geographic area.

Additional competitors have and may enter our primary market of Indianapolis and/or acquire institution(s) in our markets and increase competition. Further, new and additional competitors may make it more difficult and expensive for the Corporation to attract and retain key employees and customers.

The Corporation believes the banking and financial services industry in general will become even more competitive as a result of legislative, regulatory and technological changes and the continued consolidation of the industry. Technology has lowered barriers to entry and made it possible for non-banks to offer products and services traditionally provided by banks, such as automatic funds transfer and automatic payment systems. Also, investment banks and insurance companies are competing in more banking businesses such as syndicated lending and consumer banking. Many of the Corporation’s competitors are subject to fewer regulatory constraints and have lower cost structures. The Corporation expects the consolidation of the banking and financial services industry to result in larger, better-capitalized companies offering a wide array of financial services and products.

The Corporation is heavily regulated by federal and state agencies.

The holding company and its subsidiary bank are heavily regulated at the federal and state levels. This regulation is designed primarily to protect consumers, depositors and the banking system as a whole, not shareholders. Congress and state legislatures and federal and state regulatory agencies continually review banking laws, regulations and policies for possible changes. Changes to statutes, regulations or regulatory policies, including changes in interpretation or implementation of statues, regulations or policies, could affect the Corporation in substantial and unpredictable ways including limiting the types of financial services and products the Corporation may offer, increasing the ability of non-banks to offer competing financial services and products and/or increasing the Corporation’s cost structures. Also, the Corporation’s failure to comply with laws, regulations or policies could result in sanctions by regulatory agencies and damage to its reputation.

The Corporation is subject to examinations and challenges by tax authorities.

In the normal course of business, the Corporation and its affiliates are routinely subject to examinations and challenges from federal and state tax authorities regarding the amount of taxes due in connection with investments it has made and the businesses in which it is engaged. Recently, federal and state taxing authorities have become increasingly aggressive in challenging tax positions taken by financial institutions. These tax positions may relate to tax compliance, sales and use, franchise, gross receipts, payroll, property and income tax issues, including tax base, apportionment and tax credit planning. The challenges made by tax authorities may result in adjustments to the timing or amount of taxable income or deductions or the allocation of income among tax jurisdictions. If any such challenges are made and are not resolved in the Corporation’s favor, they could have an adverse effect on the Corporation’s financial condition and result of operations.

Maintaining or increasing the Corporation’s market share depends on market acceptance and regulatory approval of new products and services and other factors.

The Corporation’s success depends, in part, on its ability to adapt in products and services to evolving industry standards and to control expenses. There is increasing pressure on financial services companies to provide products and services at lower prices. This can reduce the Corporation’s net interest margin and revenues from its fee-based products and services. In addition, the Corporation’s success depends in part on its ability to generate significant levels of new business in its existing primary market of Indianapolis. Further, the widespread adoption of new technologies, including Internet-based services, could require the Corporation to make substantial expenditures to modify or adapt its existing products and services or render the Corporation’s existing products obsolete. The Corporation may not be able to successfully introduce new products and services, achieve market acceptance of its products and services, develop and maintain loyal customers and/or break into targeted markets.

The holding company relies on dividends from its bank subsidiary for most of its revenue.

The holding company is a separate and distinct legal entity from its subsidiaries. It receives substantially all of its revenue from dividends from its bank subsidiary. These dividends are the principal source of funds to pay dividends on the holding company’s common stock and interest on its debt. The payment of dividends by a subsidiary is subject to federal law restrictions as well as to the laws of the subsidiary’s state of incorporation. Also, a parent company’s right to participate in a distribution of assets upon a subsidiary’s liquidation or reorganization is subject to the prior claims of the subsidiary’s creditors.

The Corporation’s accounting policies and methods are the basis of how the Corporation reports its financial condition and results of operations, and they may require management to make estimates about matters that are inherently uncertain.

The Corporation’s accounting policies and methods are fundamental to how the Corporation records and reports its financial condition and results of operations. The Corporation’s management must exercise judgment

in selecting and applying many of these accounting policies and methods in order to ensure that they comply with generally accepted accounting principles and reflect management’s judgment as to the most appropriate manner in which to record and report the Corporation’s financial condition and results of operations. In some cases, management must select the accounting policy or method to apply from two or more alternatives, any of which might be reasonable under the circumstances yet might result in the Corporation’s reporting materially different amounts than would have been reported under a different alternative.

The Corporation has identified three accounting policies as being “critical” to the presentation of its financial condition and results of operations because they require management to make particularly subjective and/or complex judgments about matters that are inherently uncertain and because of the likelihood that materially different amounts would be reported under different conditions or using different assumptions. These critical accounting policies relate to: (1) the allowance for loan and lease losses; (2) goodwill; (3) the valuation allowance for deferred taxes. Because of the inherent uncertainty of estimates about these matters, no assurance can be given that the application of alternative policies or methods might not result in the Corporation’s reporting materially different amounts.

More information on the Corporation’s critical accounting policies is contained in Item 7, Management’s Discussion and Analysis of Financial Position and Results of Operations and Note 12 of the Notes to Consolidated Financial Statements.

The Corporation is dependent on senior management.

The Corporation’s continued success depends to a significant extent upon the continued services of its senior management. The loss of services of any of the Corporation’s senior executive officers could cause the Corporation’s business to suffer. In addition, the Corporation’s success depends in part upon senior management’s ability to implement the Corporation’s business strategy.

The Corporation’s stock price can be volatile.

The Corporation’s stock price can fluctuate widely in response to a variety of factors including:

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Actual or anticipated variations in the Corporation’s quarterly results;

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New technology or services by the Corporation’s competitors;

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Unanticipated losses or gains due to unexpected events, including losses or gains on securities held for investment purposes;

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Significant acquisitions or business combinations, strategic partnerships, joint ventures or capital commitments by or involving the Corporation or its competitors;

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Changes in accounting policies or practices; or

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Changes in government regulations.

General market fluctuations, industry factors and general economic and political conditions, such as economic slowdowns or recessions, interest rate changes, credit loss trends or currency fluctuations, also could cause the Corporation’s stock price to decrease regardless of its operating results.

The Corporation may be a defendant in a variety of litigation and other actions, which may have a material adverse effect on its business, operating results and financial condition.

The Corporation and its subsidiaries may be involved from time to time in a variety of litigation arising out of the Corporation’s business. The Corporation’s insurance may not cover all claims that may be asserted against it, and any claims asserted against the Corporation, regardless of merit or eventual outcome, may harm the

Corporation’s reputation. Should the ultimate judgments or settlements in any litigation exceed the Corporation’s insurance coverage, they could have a material adverse effect on the Corporation’s business, operating results and financial condition. In addition, the Corporation may not be able to obtain appropriate types or levels of insurance in the future, nor may the Corporation be able to obtain adequate replacement policies with acceptable terms, if at all.

Item 1B. Unresolved Staff Comments

None.